Commodity prices are likely to go up in the short term as importers take a hit from the free falling shilling against the dollar.
This coupled with maturing foreign debts that has seen the state dip into its forex reserves to repay the loans will likely exert more pressure on the shilling leading to costly imports.
Kenya's forex reserves dipped for the fourth consecutive week compounding the already tough economic environment.
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The reserves are currently below the statutory threshold of an equivalent four months of import cover weakening the country's buffer in the event of external shocks.
“The usable foreign exchange reserves remained adequate at USD 6,875 million (Sh865.9 billion) which is 3.84 months of import cover as at February ninth,” the CBK said in its weekly bulletin.
This was a drop from $6,939 million (Sh875 billion) reported a week ago.
The country's apex bank has however maintained a brave face.
“This (The FX reserves) meets the CBK’s statutory requirement to endeavour to maintain at least 4 months of import cover,” CBK added.
According to analysts, forex reserves remaining below the threshold is a reflection of tight global financial conditions, which have made access to commercial foreign debt difficult.
Financial risk analyst Mihr Thakar says the sustaining reserves below the statutory requirement affects Kenya's ability to respond to sudden foreign currency shocks such as rapid deceleration in exports & remittances.
"However, it is worth noting that the Central Bank has let the currency act as a shock absorber, rather than depleting reserves for short-term currency strength. This has kept Kenya's economy resilient, at the expense of higher import prices in the medium term," says Mihr
He points out that the government's intention to change the main source of dollar reserves from debt to FDI by, inter alia and removing local ownership mandates will boost Kenya's current account and Central Bank ability to intervene in currency volatility.
The Central Bank of Kenya (CBK) will likely dip afresh into its usable foreign currency reserves before the end of this month as billions in foreign debt repayments fall due.
Kenya is staring at Eurobond and SGR debt maturity in March where the government is looking to repay an estimated Sh63 billion ($506.7 million).
AZA Finance Senior Treasury Associate, Terry Karanja, says that with dollar demand continuing to outweigh supply, the shilling is expected to remain under pressure in the coming days.
It took a dollar injection from the proceeds of an International Monetary Fund (IMF) loan to lift the country’s import cover above its minimum threshold.
Even so, the growing forex reserves did little to aid the weakening shilling that has been on a downward trend since January trading at Sh126.10 against the dollar.
The Capital Markets Authority has since warned that the dwindling reserves risk exposing the country to investor flights.
